Closing premium gap

We have just about completed the first month of the hurricane season and there has so far been only one named storm. The prediction is that there will be somewhere between 13-15 storms for the season which makes it comparatively quiet, when compared with last year.

Nonetheless, we must be prepared for these natural phenomena on account of our geographical location. Insurance is an indispensable element of the risk management strategy as everyone has to play a role in minimising loss of property and life — from the clearing of water courses and the maintenance of the environment to timely response by public authorities when a disaster occurs.

In times past, there was a widely-held view that Trinidad and Tobago lies outside of the hurricane belt but this is no longer the case as recent experience has shown that we have had close calls and one day we may not be so lucky.

However, it will be true to say that we have the lowest level of exposure when compared with the rest of the Caribbean and southern United States. The question is whether the insurance premiums in Trinidad and Tobago reflect the true risk exposure, to warrant the large differential between our premiums and those charged in the region and the southern United States.

In the greater Miami area, homeowners pay roughly 1.6% of insured value, the Bahamas 2.0%, the Cayman islands 2.5%, Jamaica 1.5% while in Trinidad and Tobago the cost is in the region of 0.4%. It means that a homeowner in greater Miami is paying four times what a Trinidad and Tobago homeowner pays for insurance coverage.

The major international market players do not believe that the risk is adequately priced in view of the wide disparity that currently exists from the USA in the north to Trinidad and Tobago as the most southerly islands in the chain. Insurance companies and reinsures are in the risk business so they are not afraid of risks as long as they receive an adequate premium. The local insurance industry is heavily dependent on the international market for its protection against catastrophic losses, since hurricanes and earthquakes have the potential to inflict a heavy toll and reinsurance coverage becomes essential to safeguard its capital base. While every insurance company can absorb individual losses, it is the number of losses arising out of a single event, as in the case of a hurricane or earthquake, that will endanger the financial viability of the insurance industry if adequate reinsurance is not in place.

The impact of the Katrina/Rita losses arising from the single largest loss to the insurance industry is only now flowing through and the information coming out of the recently ended conference of the Insurance Association of the Caribbean, held in Jamaica earlier this month, is that the region should brace itself for increased pricing.

Moreover, if the depressed premiums in Trinidad and Tobago continue then business from this country will be even less attractive, compared with risks across the region and the United States and that will have implications when reinsurance arrangements are re-negotiated at renewal. In particular, insurance companies in the Caribbean will be competing for reinsurance capacity with carriers in the United States, as reinsurers are able to get a higher premium volume and a faster payback when they payout on claims. We are at a disadvantage since the payback period is significantly longer and therefore our business is less attractive.

Moreover, it will not be long before local companies are required to provide their reinsurers with detailed analysis of their risks, in accordance with risk assessment models that allow for an early determination of the loss exposure following disasters. Depending on what these models reveal reinsurers will then price their coverage and they will certainly impact on the domestic market as they will have a better information base on which to set their premiums.

We live in a globalised world, and therefore as price takers we are required to respond to international market conditions and if the international markets adjust their prices upwards, it is simply a commercial reaction and the insuring public will have to bear the brunt of the price adjustment. This is only mitigated as a result of competition.

In the final analysis, the news is not good as we are likely to be faced with higher prices and less coverage in the coming months. All of this is the present forecast, but should we have another active hurricane season or worse, should Trinidad and Tobago suffer losses from any natural disaster then all bets are off!

The current pricing is already below what is perceived as an adequate rating level for our risk and therefore any adverse set of circumstances will only make matters worse as it will act as the impetus to achieve the required rate hike.

The insurance industry has its role to play. It is there to respond when a disaster occurs and to come up with the funds to settle claims on a timely basis as long as the verification process is satisfied. It is worth noting that claims were settled in the Katrina loss in the United States which the authorities are now discovering were fraudulent and steps are in train to recover those monies. The lessons to be learnt are that unscrupulous persons always find ways to benefit in situations like these and insurance payouts must be properly scrutinised to minimise incidences of fraud. Property owners must behave as if they did not carry insurance and therefore take steps to protect their property.

The authorities must have strategies in place to respond quickly in times of disaster, but more importantly, they must take preventative measures in advance to reduce losses. We are all in the same boat and must work collectively as these risks will not go away.

Bernard K. Aquing, Chartered Insurer
Consultant to the Association of
Trinidad and Tobago Insurance Companies (ATTIC)